Author: Sophie Wood

The most change in Agribusiness Finance since the GFC.

Slow, Slow, Slow.

Slow seems to be the common feedback we’re receiving across the board as we place transactions with various lenders in the industry. In general, we are seeing a withdrawal of services from rural lending with one bank ‘top heavy’ in the beef sector limiting them from taking on new deals, one bank going through a major restructure, and another agribusiness player being purchased. In addition to these industry movements, we have also observed a large reduction in the branch network that impacts many rural clients. Based on current trends, in the medium term, unless you have lending over $5million, it is likely that you might not have a dedicated relationship manager in the next 5 years.

So, why are Agribusiness divisions going through large restructures?

Restructures and consolidation across the industry have been happening for some time. We’re seeing Agribusiness divisions undertaking restructures because in comparison to previous years, they’re not seeing lending books or future profit returns grow as quickly as they have. It is estimated that the main cost to an Agribusinesses Division Bank are the people (approx. 80%), and the only way to increase profitability is to reduce people and digitise their offering. For clients requiring less than $5milion in lending, it is anticipated that their communication channels will be through a call centre or over the phone with their manager. These changes will be made to ensure that future profits are delivered as the system growth reduces in future years due to a deliberate slow down by the RBA.

Why are bank branches closing?

Many banks are shutting branches because of a reduction in face-to-face cash transactions by retail customers. This doesn’t have a direct impact on Ag lending, but more of an indirect impact. As business owners, it can be difficult to open new accounts with trusts and companies involved, and often this requires face-to-face expertise that is usually associated with an in-person meeting.

Why do banks stop lending in certain sectors?

At times, banks grow too quickly within a sector, and this is when we see restriction on lending to new clients put in place. Banks may follow a one client in, one client out scenario, and this is currently what we’re seeing, because they have grown too quickly through ‘boom year’s’.

Acquisition making change in the Ag lending.

One major bank is currently going through the process of buying another Regional Bank with around 4 billion in Ag lending. This acquisition will likely generate a large amount of change, particularly in the Queensland market. This change will be around people and the consolidation of those businesses overtime.

As we navigate these changes, we recommend to our clients:

• It’s never been so important to properly present your business to lender.
• It’s never been more important to be on the font foot and proactive around finances.
• Given the turmoil in agribusiness lending, it is critical to get another option right now.

The nose in, hands out approach.

Different lifestyles and stages of life often drive the succession conversation. Generally, we see two different generations working together with different cashflow needs.

Typically, the existing or the current generation may be aged between 50 – 80yrs of age and tend to take less risk to allow more time for family and travel. To achieve this lifestyle, they will need to increase their cashflow by way of dividends, salaries or drawings. In contrast to this, the next generation is wanting to grow the business, and growth of any kind requires cashflow.

With different generations and life stages comes different business strategies based on what each generation is working to achieve. As an advisory business, we spend a lot of time working with clients to develop and agree upon an intergenerational business strategy, often working through tension and tough conversations around reinvesting back into the business and when to take cash out of the business.

Developing and agreeing upon a business strategy is a normal and difficult step to take, as there can be an underlying, natural conflict between the generations before taking the business and family relationships into consideration.

Ideally, we look for a nose in, hands out scenario from the existing generations, where they are adding value, involved where they want to be, and are more strategic, however they have their hands out of the day-to-day business. This positioning will allow the next generation to step up and execute the business activities and get the day to day done their way.

To execute this approach, families need to set the guardrails and provide governance to the next generation and outline what is important to them.

When working with families, we start by developing an Owner Strategy Statement, with three key steps:

Step 1. Define Your Purpose

• Defining the purpose of your family business.
• Why do you want to own your business together as a family?

Step 2. Set Your Owner Goals

• Specify your concrete goals.
• A great exercise we do to determine goals is to review the Owner Strategy triangle. You can choose to prioritise any two of the goals at the expense of the third.

Step 3. Create Owner Guardrails

• It’s time to translate your purpose and goals into specific measurements that can be used to make decisions.
• Guiderails can be financial or non-financial.

Once a family’s strategy and guardrails are set, the next generation will be able to take the lead on the business knowing what’s important to both generations.

To create an Owner Strategy Statement, contact us today; Contact Us – Sproutag

“If you fail to plan, you are planning to fail.”

As farming businesses grow, the level of planning needs to grow with the business, so the planning process becomes much more important and complicated.

At SproutAg, one of our mantras to our clients is to “get organised”. When we have this conversation with clients, we’re quite direct because we see first hand the difference that being organised can make to a farming business and the opportunities that can arise.

2023 saw a large variance in commodity prices and seasonal fluctuations that saw working capital requirements and the cost of interest much higher than anticipated. Currently, we are still facing inflation in Australia, the cost of goods has not come down and we anticipate that interest rates will remain high. But within all of this, opportunities have arisen, and it is the well organised family businesses that can take advantage of these opportunities.

To get your family business organised, these are our top three areas for you to consider in 2024:

1. Getting through 2024 and what to consider
2. Planning for growth with positivity
3. Family business planning and generational planning

Getting Through 2024

The first step to getting through 2024 is to review 2023, and identify where your family business is at. This is achieved by using the ‘Where did the money go’ tool from our AgPro program. Following this review, you can complete three cashflow forecasts for the year, before setting up appropriate funding to achieve success.

Your first goal in working capital is to set funding limits that will cater for most scenarios, where you will only need to go back to the bank once as opposed to hat in hand later in the season asking for more. It is important to factor in higher costs and lower revenue, and to set your debt limits up one bracket for the year ahead. What we find with clients is that working capital increases were quite frequent towards the end of 2023, and they take time, so it is important to have the philosophy to tackle this only once in 2024. This is also the time to consider and work in small opportunities for your family business, i.e. livestock purchases or other opportunities.

For additional help and tools talk to your local SproutAg adviser.

Planning for Growth

If you’re planning to develop your country or farming infrastructure or looking to buy new machinery or another property, get organised and don’t wait until the last minute – plan for the acquisition and development and get the acquisition pre-approved ahead of time. Getting pre-approval can take a considerable amount of time, so it is important to get your ducks in a row early in the year to make the process easier.

It’s important to remember that growth often comes from careful planning.

Family Planning and Generational Planning
Your third area to consider in 2024 is family business planning and generational planning. You need to start by asking yourself, “What are my asset policies in the business?” What we mean by this is, you have your farming assets, and you may have three children. How do you think about your assets longer term and how do you start to set yourself up so that one day you may not rely on the day-to-day farming or trading entities.

Family businesses who do well with succession planning and transitioning start the process early, giving themselves time. There is no better time to start your longer-term planning than today!

Here are some key questions to ask yourself to get started:

Do I want my family business to continue to the next generation?
What are your family’s long-term (10-30 year) goals?

Once these long-term goals have been identified, we break it down and look at the next three to ten years:

• Where do you want to live?
• What do you want to be doing?
• What will your lifestyle look like?
• What will your asset policy look like for working and non-working family members?
• How do you communicate and set expectation early?

Find out more about our succession planning guide here.

To get your finance organised for 2024, our biggest advice is to be proactive and do something about it!

Getting stuck in farm succession planning and how to get out.
We often work with families on farm succession planning who’ve frustratingly been going around in circles for years and have become stuck in the decision-making process. When we start the conversation, it’s soon discovered that there may only be a few small changes to make and that it is easy to become unstuck. For some families it may take a significant catalyst to commence their succession planning i.e. a health diagnosis, serious fallout or a long-held disagreement.

When working in a family business, you’re managing blood relations, finances and a business, and it can often be difficult to get the combination of the three correct. When there is deep respect and love for family members involved, the conversations can be more difficult to have.

What do we mean by getting stuck in farm succession planning?
Families can often get stuck in the decision-making process, when issues are avoided or when discussions go around in circles, sometimes for years, or even decades. An issue may be approached, but if there are disagreements or misalignments it can easily become stuck.

What does being stuck look like?
Being stuck can take many forms, an issue may never be spoken about, or if it is, there is constant conflict over the smallest discussion.

What are the consequences of being stuck?
In our experience, ‘becoming stuck’ not only has consequences on the business, but also strains on family relationships that continue to escalate and mental health issues that arise from unresolved problems year after year.

What can happen to the business?
When families aren’t aligned, a business can go around in circles and major decisions are delayed or put on hold. This can affect a business’s ability to make acquisitions or further develop the operation with new or innovative ideas limiting the business’s productivity.

Commonalities and tools to manage being stuck.
Common areas where we see clients stuck and unable to progress with succession planning are:

Common Barrier Number One:
When an existing generation worry that there will be a divorce event in the next generation, and that they will lose their wealth. As a result, the decision-making process grinds to a halt, sometimes before it even starts.

This scenario may take the SproutAg team two or three conversations to understand that this possibility is seen as a roadblock to the current business owners in that family. While there are many tools available to mitigate the risks for family members against family law events, family members can feel uncomfortable raising the topic, which leads to the family being stuck on an issue they don’t feel comfortable discussing. Each family and family business structure is different, and to enable future growth and to protect the broader family there are different tools available including:
– Marital deed or prenup (although these are not as common in Australia)
– Sunset clause
– Registering a caveat and/or second mortgage.

*Note that every circumstance is different, and that these tools are not recommended for individualised scenarios. For individual advice, reach out to the SproutAg team.

Common Barrier Number Two:
The existing generation wants to keep working on the farm and still be involved.
The next generation can often see the desire for the existing generation wanting to stay involved and not wanting to give up control or take on the next generation’s new ideas. These unspoken feelings can lead to family conflict and can cause families to become stuck. Often there are few roles and responsibilities that the existing generations wish to keep, however it is important to identify these early in the succession planning process and keep them at the forefront of the plan to ensure all parties are accountable.
– Meeting schedules
– Roles and responsibilities map.
– Future organisational chart.
– Employment contract with set roles and responsibilities.

Download a copy of our free succession planning guide on our website here.